The International Franchise Association valued the revenue of all 780,000 independently owned franchises to be $889 billion for the year of 2015. It also set growth for 2016 at 1.7%. This comes after growth of 1.7% during 2015 for all U.S. franchises. Growth has consistently been low for franchises in the United States, likely as a reaction to consumer demand. With cities and suburbs across the nation already teeming with franchise branch locations, it is not likely that the 1.7% growth figure will experience a sudden increase.
Franchises came about as a favorable legal arrangement that allowed a corporation to distance itself from its many locations. By selling franchises to business owners who then run the franchises as their own businesses, the corporation shields itself from lawsuits and from monetary loss. It is a system that benefits the brand of the franchise while exposing individuals to business risks that are unique from the risks associated with owning a business that is detached from the sway of a large corporation. A corporation wields high levels of control over its franchise branches, and corporations do not plan for astronomical changes in franchise income from one month to the next. This likely contributes to the low growth rate in total revenue over 2015 and the low projections made for 2016.
Growth among U.S. franchises in the restaurant sector shows the strongest signs of recovery, with the most jobs added of all franchise sectors. Of the 18,500 franchise jobs added to the U.S. employment market in February 2016, close to 78% were of restaurant franchises, while hotel franchises comprised 10% of February 2016 franchise jobs.
Recent changes in U.S. workers' wage standards will not help the growth of U.S. franchises and could force industry-wide changes to control rising corporate costs. Health care coverage standards set by the Affordable Care Act also contribute to these costs. Of all U.S. franchises in 2016, McDonald's Corp. (NYSE: MCD) may be the most vulnerable to changing wages due to the huge workforce it employs.
Food Chains add Territory
Franchise growth relies on a business model of recruiting franchise owners through widespread marketing and target marketing. Dunkin' Brands Group Inc. (NASDAQ: DNKN) grew to 8,300 Dunkin' Donuts franchises by 2015 by using aggressive recruitment methods to expand business operations domestically and overseas. Some franchises have already changed their brand images to compete with similar companies.
Owning a Franchise
Investors and future franchise owners should consider franchise brands of smaller and up-and-coming companies in 2016 and assess the stability of real yields of chains. Business owners should gather the necessary evidence of profitability on their own before signing deals with franchise companies.
Franchises are sold by the corresponding company and by previous managers. While restaurants overwhelm the industry, more space for growth may be found outside food chains. Large and small food chain franchises face challenges in customer engagement and loyalty. Though restaurant franchises are growing in store numbers, this is likely a reflection of the chain's strategy to gain profits through location prevalence rather than a reaction to product demand.
Court Cases Set Precedents
Recent trials against McDonald's for workers' rights violations have put more pressure on U.S. franchises to change their corporate structures and the employment process for minimum wage employees. McDonald's maintains it should not be held liable for rights violations in its stores. If unfavorable verdicts are set against McDonald's, they will affect the legal relationship corporations have to their franchise locations and will further impact the bottom line of franchisers in the United States and abroad.